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Official Opinion 95-9

Official Opinion 95-9

March 2, 1995

To:

Chancellor Board of Regents of the University System of Georgia

Re:

A public relations agreement whereby a private company permanently acquires the preeminent right to associate its name commercially with the property of the state violates the "joint ownership" prohibition of the Georgia Constitution.

The staff of the Georgia Institute of Technology has submitted for my review a Sponsorship Agreement and two leases between the Georgia Tech Athletic Association and the McDonald's Corporation (respectively, the "Sponsorship Agreements," the "Association," and "McDonald's").

Various aspects of the Sponsorship Agreements merit comment, and my staff will provide further advice and assistance as indicated. However, the crux of the matter is a payment by McDonald's for certain sponsorship rights, some of which are exclusive and some of which are granted in perpetuity. These include the association of McDonald's name forever with Alexander Coliseum, where Georgia Tech plays its basketball games. This right is implemented, in part, by permanently affixing a McDonald's logo on the floor of the basketball coliseum and on the exterior of the coliseum building. Similarly, the logo must always be included on the tickets, advertising and promotional materials for Association events in the Coliseum, and McDonald's shall always have an executive suite in the coliseum for all men's and women's basketball games. Other provisions enhance these rights and negate the power of the Association to give such rights to others. While

the word is not used, the agreement amounts to a "purchase" of rights within property and goodwill.

The Association, a private corporation, rents the athletic facilities at Georgia Tech from the Board of Regents and in return uses them to provide "physical training, recreation and athletic programs as part of the general education program." The rights in the Association and in the Sponsorship Agreements derive from state property and relate to state programs controlled by the Board. Ga. Const. 1983, Art. VIII, Sec. IV, Para. I(b), (d). The Constitution prohibits the state from becoming a "joint owner" with any "company." Ga. Const. 1983, Art. VII, Sec. IV, Para. VIII. To allow the sponsorship rights described above would go beyond conventional advertising and acknowledging contributions of sponsors and beyond a conventional grant of unneeded property for an easement, license or lease, under which McDonald's might conduct its own separate or even cooperative activities. Nearly tantamount to endorsement, these rights prominently and forever intertwine the commercial name and reputation of McDonald's with the good will, property and higher education programs of the State of Georgia. The placement of the logo within the exterior wall and basketball floor is like the joint fence or "party wall" found prohibited in 1952-53 Op. Att'y Gen. p. 100, and the rights given McDonald's create the kinds of entrepreneurial entanglements the "joint ownership" prohibition historically was intended to stop. See Park v. Candler, 113 Ga. 647, 664-66 (1901); 1989 Op. Att'y Gen. 89-16.

The Sponsorship Agreements place the Board and Association in an untenable position. I gather that the Association intends to use the funds paid by McDonald's to renovate athletic facilities owned by the Board of Regents, including those to be used by McDonald's. For the Board to confirm the rights now, or to acquiesce in them over time as an act of discretion, would place the arrangement within the full force of the prohibition discussed above. To allow the arrangement to proceed but later reject it, by controlling the rental agreement with the Association, would, under the terms of the Sponsorship Agreements, obligate the Association to reimburse McDonald's a declining but large sum of money (even after twenty years, still $1.3 million). The threat of imposing such an obligation on an entity which conducts educational programs of the Board and manages Board facilities would necessarily restrain the discretion of the Board and tend to coerce it toward educational policy and fiscal decisions it might not otherwise make. Legally, to allow this dilemma to continue would violate the rules against binding successors in office, joint ownership and pledging the credit of the state. Ga. Const. 1983, Art. VII, Sec. IV, Para. VIII; see Richmond County v. McElmurray, 223 Ga. 440 (1967); Renfroe v. City of Atlanta, 140 Ga. 81 (1913); Aven v. Steiner Cancer Hosp., Inc., 189 Ga. 126, 139-46 (1939).

Therefore, under the facts presented, it is my official opinion that the Sponsorship Agreements, by which McDonald's permanently acquires the preeminent right to associate its name and reputation commercially with the property, goodwill and programs of the state, in part by prominently affixing its corporate logo on state property where such activities are conducted publicly, violates the "joint ownership" prohibition of the Georgia Constitution.

Prepared by:

JOHN B. BALLARD, JR. Senior Assistant Attorney General

APPENDIX

Paraphrased Synopsis of McDonald's Sponsorship Agreement

McDonald's pays $5.5 million for the Sponsorship Rights, $2 million down and the balance in six annual installments.

The Sponsorship Rights are granted in perpetuity unless the Agreement says otherwise or is terminated. (GTAA may terminate if McDonald's does not pay, becomes insolvent or does not perform its obligations under the agreement or leases, but its obligations under the agreement are minimal compared to GTAA's, and, except in case of material breach, the name, "McDonald's Center" is permanent.)

The "Area" around and including Alexander Coliseum is named "McDonald's Center" (or, according to a later "clarification," "McDonald's Center at Alexander Coliseum." The clarification indicates intent not to rename any existing building, but it apparently does not negate the naming of the "Area." For present purposes, the clarification is assumed to be effective.) The McDonald's Center designation applies to any replacement facilities in or outside the Area; in other words, it follows the function. Changes may not be made which adversely affect restaurant operations without approval.

The McDonald's Center Area must be "identified and promoted" by certain, specified methods "and any additional methods." The specified methods include:

McDonald's may design and have GTAA place and maintain a McDonald's logo on

the exterior of the Coliseum;

all tickets for GTAA events at the Coliseum (and GTAA must use "best efforts" to place on others);

the floor of the basketball court;

"a free standing monument as permanent outdoor signage identifying the Area as the McDonald's Center." (This right is specified in a section of rights given for seven years with perpetual but conditional right of renewal for a fee, but it is, as indicated, described as "permanent.")

For seven years a similar right is given to place a logo, signage and promotional exposure in or on the Coliseum scoreboard, player chair backs, Dodd Stadium, the cover of all programs, the billboard in Chandler baseball stadium, and subject to Board and governmental approval, a direction sign at Techwood and North. McDonald's must have equal or greatest prominence and, on the cover, no one else. These rights are renewable at standard book rates perpetually unless McDonald's does not renew.

For seven years (with similar right of renewal), McDonald's shall have no cost advertising on inside front covers of programs for football and men's and women's basketball games and for the football street festival.

Subject to Board approval (according to "clarification"), GTAA grants McDonald's the right to use the Georgia Tech name in McDonald's advertising of restaurants in the Coliseum and Rice Center.

GTAA must position and promote the McDonald's Center name in connection with all events held in the McDonald's Center Area. GTAA must use "best efforts" to get national television exposure, featured prominently, for the McDonald's Designations, including asking announcers to state that the event is coming from McDonald's Center.

McDonald's receives a perpetual executive suite for men's and women's basketball games with fifteen tickets. For seven years (with similar, perpetual renewal), there are seven other ticket and benefit packages.

McDonald's receives "continuing right of first negotiation" to provide the food and beverage service at football games.

At the Coliseum, McDonald's may provide food and beverage service if it wishes, and, if it does not, only non-branded food may be served. [McDonald's is given two, twenty-five year commercial leases for restaurant sites at the Coliseum and at Rice Center. These generate base and percentage rental for GTAA.]

To promote "exclusivity," McDonald's receives:

the right to be the exclusive restaurant at McDonald's Center and Rice Center, and restraints are imposed upon advertising sponsorships for radio and television programs at the McDonald's Center.

GTAA may not grant the right to use the "Georgia Tech" name to any other Restaurant Category entity in connection with the Center.

If GTAA gains control over coach affiliations, it must use "best efforts" to include their commitment to McDonald's Sponsorship Rights at no expense to McDonald's. Coaches may not be allowed to use the "Georgia Tech" name in fast food restaurant endorsements.

As "Additional Promotional Opportunities," GTAA must make best efforts to promote McDonald's for other campus promotional opportunities (including directional signs, advertising, student meal plans, student employment, cross-promotional PR, auto teller machines, scholarships, Ronald McDonald charity volunteers, and volleyball signage). The clarification acknowledges that this is not binding upon the Board but continues to bind GTAA to "fulltime best efforts."

GTAA must use its best efforts to ensure that it, and its employees, coaches and players do not take actions detrimental to McDonald's. (There is no reciprocal provision for GTAA.)

McDonald's, and not GTAA, owns as "work-made-for-hire" all the materials and concepts GTAA may prepare in promoting McDonald's under the Agreement.

Pursuant to the request of the Chancellor and of President Clough to the Attorney General, I have provided legal assistance to you in the re-negotiation of the sponsorship agreement between the Georgia Tech Athletic Association and McDonald's Corporation, which was the subject of the official opinion of March 2, 1995. This confirms my advice that the changes in the "Amended and Restated Sponsorship Agreement" resolve the legal objections to the original version and permit the Board of Regents to allow the sponsorship according to its discretion.

Summary of Changes

The issues have been resolved by changes in the scope and duration of the agreement. Without reducing its payment, McDonald's has agreed to reduce the term of the principal rights from "perpetuity" to ten years and to describe these rights as licenses which are revocable under certain terms and conditions. These new terms are intended in part to protect the educational mission of the Board. For example, the license to place logos, except on informational and directional signs, is limited to the duration of Association events. The license is also now expressly subject to the right of the Association and of the Board to comply with rules of agencies which accredit academic institutions and regulate intercollegiate athletics.

Two renewal periods of ten years each may not take effect unless the Board, in its educational discretion, affirmatively authorizes each renewal separately. If the Board does not allow either renewal period, there is no longer a forfeiture of liquidated damages. Instead, part of the sponsorship fee would then be converted into a pre-payment of rent on the two restaurant leases, and the Association would not be able to grant similar rights to anyone else for the duration of the leases.

Certain adjustments of the sponsorship fee remain possible if the sponsorship rights are lost or limited within the ten year period. However, the amended Sponsorship Agreement expressly provides that McDonald's may not have recourse against any state property or against any Association property, which is held in trust for, or on behalf of, the state, nor is the Board obligated to continue its relationship with the Association. If the Board discontinues the relationship, it will become the landlord under the restaurant leases but without assuming any existing liability of the Association and under terms consistent with state law requirements.

The close association implied by the permanence and scope of the original terms was enhanced by other provisions no longer present. For example, the Association is no longer required to help McDonald's obtain additional promotional opportunities on the main campus, to provide a room in the team hotel at tournaments, to keep team players from reflecting unfavorably upon McDonald's reputation, to clear press releases about the sponsorship agreement with McDonald's, and to let McDonald's own the worldwide rights to intellectual property created by the Association under the agreement. All of these provisions are eliminated. Under new provisions, cooperation in use of creative materials will remain but under clearer guidelines. The Association will own its own intellectual property. The Board's ownership of Georgia Tech tradenames and trademarks is recognized, and the Georgia Tech licensing committee will control each specific use of items owned by the Board. Finally, in lieu of protection for McDonald's reputation, there is a provision for revocation if McDonald's acts bring disrepute not appropriate for a relationship with a public university.

Discussion

The conversion of the permanent sponsorship rights to a ten-year license limited in scope and duration eliminates the formal concern with joint ownership, and the removal of terms discussed in the preceding paragraph alleviates concerns about entrepreneurial entanglements.

The provision for pre-payment of rent rather than forfeiture of fees in case the Board declines to allow renewal after ten years resolves the pledge of credit objection as stated in the opinion. Removing Board assets and assets held for the Board from McDonald's reach in enforcing the sponsorship agreement further alleviates the concern, particularly in regard to remaining provisions for fee adjustment within the ten year period.

The key to resolving the prohibition against binding successors is the distinction between governmental and proprietary discretion. The former, which in this case concerns the educational mission of the Board, is subject to the rule against binding successors in office. The latter, which concerns the business decisions of the Board regarding disposition of its assets, is not subject to the rule. See Southern Airways Co. v. DeKalb County, 102 Ga. App. 850 (1960). Thus, in deciding to allow association of the McDonald's name with athletic events and facilities, the Board is making a decision within its educational discretion and is subject to the rule. In deciding whether to allow the exclusivity provisions and commercial subleasing of its property for the restaurants, the Board is making a proprietary, business decision not subject to the rule.

The rule prohibits binding successors in office but permits reasonable overlapping to avoid suspension or disruption during changes in administration. Aven v. Steiner Cancer Hosp., Inc., 189 Ga. 126, 143 (1939). The determination of what is a reasonable period is a factual one, but the best available benchmark is that ten years is not unreasonable as a matter of law, from a somewhat similar situation in Jonesboro Area Athletic Ass'n v. Dickson, 227 Ga. 513 (1971). But compare Norton v. City of Gainesville, 211 Ga. 387 (1955); R. Perry Sentell, Studies in Georgia Local Government Law 591 (3d ed. 1977). [I am not aware of any precedent which discusses the rule in terms of a constitutional grant of authority, such as that given the Board to govern, control and manage the University System. Ga. Const. 1983, Art. VIII, Sec. IV, Para. I(b).]

The re-negotiated provisions adopt this analysis in limiting the sponsorship rights to ten years as they affect education programs and in limiting the Board to an educational discretion in determining whether to renew.

My advice reflects practical judgments, not certain but made in good faith in the absence of definitive precedent. It is intended for Board guidance, not for the benefit of any other party or person. Please let me know if there are any questions.

Requisite Board Actions

The specific matters before the Board are

its authorization to the Association to execute the re-negotiated sponsorship agreement and the restaurant subleases; and

its agreement

to place the sponsorship renewal notices on its agenda before the end of each ten-year period;

to limit its renewal decisions to an exercise of educational discretion, as opposed to proprietary discretion (holding out for a better business deal), and

to accept McDonald's as a tenant under the restaurant leases if it terminates or does not renew its rental agreement with the Association; and

its standard determination that the subleases are in the best interests of the University System and the property can no longer be advantageously used otherwise. O.C.G.A. § 20-3-60. (The necessity for this determination is not clear, given the constitutional power of the Board to dispose of its property, Ga. Const. 1983, Art. VIII, Sec. IV, Para. I(d), and the statutory provisions for leases to the athletic associations, O.C.G.A. § 20-3-79 et seq.)